Mobileye Deadly Downward Spiral Should Start Soon

Mobileye (MBLY), along with several other stocks, has been one of my best short recommendations of the past few months. Mobileye is already down almost 40% since my first short call, however I expect the stock to continue its downward trajectory and hit single-digit territory over the next 12 months.

For those of you who don’t know, as of writing this article, Mobileye is trading at over $28. My price target for the stock is at $5. That represents a total downside potential of over 80% in addition to the already 40% drop in the stock.

Mobileye reported its earnings yesterday and it managed to beat the analysts’ estimates on earnings as well as revenue.

Mobileye’s Q4 EPS came in at $0.15, beating the analysts’ estimate of by $0.01. On the revenue front, Mobileye’s sales jumped 81% year over year to a mere $71.8 million, again surpassing the analysts’ estimate by $1.06 million.

While the earnings report looks great, I think there’s a lot more trouble in store for Mobileye longs as the company’s growth is slowing down. Mobileye’s sequential revenue growth was almost flat and analysts aren’t expecting anything better in the upcoming quarter as well.

So, to put into perspective, assuming that Mobileye manages to meet the estimates for the upcoming quarter as well, its revenue would grow from roughly $70 million in Q3 to almost $73 million in Q4. For a company that is trading at a sky-high valuation, such growth numbers aren’t good enough. Thus, I think shares of Mobileye will tank considerably as its growth is slowly coming to a halt.

Valuation

As of writing, shares of Mobileye are trading at 186x trailing earnings and 41x forward earnings. In addition, Mobileye’s P/S ratio also stands at a towering 30. Given the valuation, investors will expect Mobileye to post terrific growth every quarter for it to grow into its $6 billion+ market cap. However, as mentioned above, sales growth is already slowing down and investors will soon realize that the stock is massively overvalued. Hence, I think investors can still short the stock despite the 40% dip.

Conclusion

Mobileye’s latest earnings report further strengthens my bear case on the company. I expect the stock to crash down to roughly $5 by the first quarter of 2017. With sales growth slowing down considerably, investors will soon bail on the stock. Mobileye’s current valuation is only supported by the hype surrounding the driverless car industry. However, as I have mentioned several times in the past, the hype is irrational and the technology is still decades away, which is why I don’t believe Mobileye can sustain its current valuation. Hence, I would still recommend investors to short the stock.